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Components of Compensation

How Do We Determine How Much To Pay Employees for Their Work?

Strategic Compensation Planning

Strategic Compensation Planning
Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization. (strategic congruence) Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-for-performance standard. Seeks to motivate employees through compensation.

Linking Compensation to Organizational Objectives

Value-added Compensation
Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization.
How does this compensation practice benefit the organization? Does the benefit offset the administrative cost?

Compensation Management and Other HRM Functions

Aid or impair recruitment


Supply of applicants affects wage rates Selection standards affect level of pay required Increased knowledge leads to higher pay A basis for determining employees rate of pay

Pay rates affect selectivity

Selection Training and Development Compensation Management

Pay can motivate training

Training and development may lead to higher pay

Low pay encourages unionization

Labor Relations

Pay rates determined through negotiation

Components of Total Compensation

Total Compensation

Intrinsic Rewards (nonmonetary) job security Status symbols Social rewards Task-self rewards

Extrinsic Rewards (monetary)

Indirect Compensation (Benefits)

Direct Compensation

Public Protection (legally required) Social Security Unemployment Disability

Public Protection Pensions Savings Supplemental unemployment Insurance

Paid leave Training Work breaks Sick days vacation Holidays Personal

Miscellaneous Benefits Legal advice Eldercare Daycare Wellness Counseling Moving Perks

Basic Salary basic shift premium

Performance-Based Pay Stock Options Bonuses Merit Incentive

Intrinsic Rewards
The motivation one receives from performing the work The Concepts of

Expectancy Theory & Equity Theory

Expectancy Theory and Pay

Expectancy Theory
A theory of motivation that holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that they value. Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.

Equity Theory
Pay, benefits, opportunities, etc.

effort, ability, experience etc.

the same, more or less



A person evaluates fairness by comparing their ratio with others.

Three Employee Views of the Pay Decision

Pay Level- Same job in Different organizations Pay Structure - Different jobs in Same organization Individual Pay Differences - Different people in Same job

Total Compensation - Extrinsic

Direct Wages / Salaries Commissions Bonuses Gainsharing

Indirect Time Not Worked

Vacations Breaks Holidays

Insurance Plans
Medical Dental Life

Security Plans

Employee Services

Educational assistance Recreational programs

Direct Compensation
What an employee gets for performing work

Factors Affecting the Wage Mix

Indirect Compensation
Dealing with employee benefits

Social Insurance
(legally required)
Social Security About 8% employer and employee tax on wages Additional Medicaid tax of 1.45% Also includes dependent coverage and Long-term Disability Unemployment Compensation Tax rate on employers is based on use/environment Eligibility: work 1 year - not on strike, quit or fired for cause Workers Compensation Disability, medical care, death benefit & rehabilitation 2/3 of earnings are tax free Rate based on risk and organizations experience rating

Types of Employee Benefits

Required By Law
Social Security Unemployment Insurance Workers Compensation Unpaid leave (FMLA) Life and LT care insurance Retirements and pensions

Health care Payment for time not worked Supplemental Unemployment Benefits

Social Security Insurance

Social Security Act (1935)
A payroll tax on both employees and employers

Old Age and Survivors Insurance (OASI) Provides long-term disability benefits Must work 40 quarters in an occupation covered by Act to qualify for benefits Benefits paid are determined by an individuals life-time earnings

Workers Compensation Insurance

Injury is a cost of doing business
Covers Employers
Assumed employment risk
Negligent co-workers Contributory negligence Survivors Insurance

Covers Employees
Cost of injury

Temporary, Permanent, Partial or Total Disability